Member of Mercosur, privileged trade relations with the EU and the United States

WEAKNESSES

Economy vulnerable to commodity prices (soya, meat, dairy products)

Dependence on the Argentine, Brazilian and Chinese economy

Inadequate transport infrastructure

Reduced competitiveness due to high inflation

Public debt (mitigated by a longer maturity and less and less in dollars)

RISK ASSESSMENT

Continued slowdown, in an unfavourable environment

In 2018, Uruguay's growth slowed due to weather conditions and the unfavourable regional context (recession in Argentina and sluggishness in Brazil). The drought has severely affected the agricultural sector, particularly soybean production, whose exports have fallen. In 2019, inflation will gradually decrease, but will remain above the target (3%-7%), leading to stagnation or even a decline in household purchasing power, with wage increases set by agreement between 6% and 8%, depending on the sector’s level of activity. Growth is therefore expected to remain limited, despite the increase in investment related to the start of work on the Ferrocarril Central rail infrastructure project in January. The goal of the project is to facilitate the transport of goods to the port of Montevideo (public-private financing estimated at USD 800 million). It is part of the negotiations with the Finnish group UPM for the possible construction of a third pulp mill, which would be the largest private investment ever made in Uruguay (USD 4 billion). UPM is required to make a decision on this matter before February 2020. In addition, as Argentina (the leading source of FDI and tourists) was affected last year by a major crisis whose effects will continue to be felt in 2019, the external contribution to growth should remain negative, despite the slight acceleration in Brazilian demand.

Deferral of the public deficit target from 2019 to 2020

The public accounts deteriorated again in 2018, burdened by weak activity that affected tax revenues. With growth unlikely to rebound in 2019, revenues are expected to remain sluggish. In addition, since 2019 is an election year, spending is expected to continue to increase. As a result, the deficit will remain high, well above the 2.5% government deficit target set in the budget consolidation programme of the 2015 five-year finance law. In this context, the government has postponed the achievement of this objective until 2020, which will therefore depend on the next government. While public debt is large and on an upward trend, the authorities have gradually increased the share of local currency denominated debt held by residents (more than half in the second quarter of 2018, compared to just 30% in 2007) and extended its average maturity (13 years), thus reducing its vulnerability.

Furthermore, the trade surplus declined in 2018 due to the fall in agricultural and energy exports caused by drought, as well as the increase in imports of intermediate goods and equipment in line with the recovery in investment. In 2019, exports are expected to grow thanks to the rebound in agricultural production and the improved economic situation in Brazil, Uruguay’s main export partner (along with China). However, at the same time, imports are expected to continue to grow faster in the wake of investment. In addition, the balance of services is expected to be particularly affected in 2019 by the fall in the purchasing power of Argentines (60% of tourists) due to the considerable depreciation of the Argentine peso last year. Unlike the balance of goods and services, the income balance is structurally in deficit due to the repatriation of dividends generated by FDI. The current account is expected to deteriorate to negative in 2019.

General elections 2019 particularly undecided

Approaching his last year in office, President Tabaré Vazquez, a member of the centre-left coalition Frente Amplio (FA), is facing a sharp decline in his popularity (25% approval in September 2018), mainly due to economic difficulties. The presidential and legislative elections in October 2019 – which he will not be able to stand for, as the country’s Constitution prohibits consecutive terms of office – are expected to be undecided: according to all polls conducted one year before the election, the FA will be in close contact with the right-wing opposition party (Partido Nacional), with each party obtaining nearly 30% of the votes in the first round. In addition, the internal elections in June to nominate the candidate of each party are also expected to be undecided.

On the right, although the defeated candidate of the 2014 election, Luis Lacalle Pou, seems to be holding the line, several other candidates have also entered the running. On the left, the prospects are all the more uncertain, as the ruling coalition is divided between the communist wing, embodied by Oscar Andrade, and the moderate wing of President Vazquez, defended by, among others, the mayor of Montevideo, Daniel Martinez, and the Minister of Industry, Carolina Cosse. However, Uruguay remains a particularly stable political country.

Despite wide room for improvement in terms of financial transparency, Uruguay is one of the preferred destinations for FDI in the region, thanks to a generally favourable business environment.